On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

Question

Quizplus · Accepted Answer

($24,000 cost - $1,000 salvage) ÷ 8 years = $2,875 original annual depreciation; $2,875 × 4 years = $11,500 accumulated depreciation at time of improvement; ($24,000 orig. cost - $11,500 accumulated depreciation + $6,000 improvement - $1,000 salvage) ÷ 4 remaining years = $4,375 new annual depreciation; Recognizing the new depreciation expense decreases assets and equity by $4,375.

On January 1, Year 1, Eller Company Purchased an Asset